Wednesday, April 16, 2008

No sovereign risk in Tabcorp/Tattslotto decision

Sovereign risk refers to the possibility that government can change legislation so that they can seize property without any possibility of adequate compensation.

Tony Harris in today's AFR (subscription required) argues that no issue of sovereign risk arises because Tabcorp and Tattersall's gaming licences were not renewed by the Victorian Government.

Gaming licences have a finite life. Those applying to Tabcorp and Tattersalls expire in 2012. This expiry date is cited in Tabcorp's annual reports.

Non-renewal is not an instance of sovereign risk.

Victoria's gaming law provides that if a new licence is issued the holder of the former licence is entitled to a payment equal to the value of the former licence (Tabcorp claims its licence is worth something less than $600 million) or the premium paid by the new licensee whichever is the lessor. Depending on the new arrangement the compensation might be nothing or a small amount - there is no implication it will be $600 million.

If the companies dislike this ruling they can sue but I don't think their chances are good - a letter from then Treasurer Allan Stockdale in 1995 to the companies states clearly that the companies must expect changes in the way the industry is run. Quote: 'I must, however, make it clear that the statement of principles in this letter does not bind this government or future governments, and, of course that the Victorian Parliament has the power at any time to amend existing legislation or pass new legislation affecting your operations or the terms on which those operations are conducted'.

The market value of Tattersalls and Tabcorp declined by $1.3 billion and $1.8 billion respectively after the government announcement. To quote Harris: 'Shareholders of Tabcorp, and probably Tatts, were mugged by unwarranted expectations, not by sovereign risk or lack of information'.

The view of commentators such as Stephen Bartholomeusz that the government's decision not to award compensation is 'immoral' seem misplaced. On issues of morality I think it is reasonable to ask why Joan Kirner gave such a huge profit entitlement to two private companies in the first place and why Labor politicians and party hacks have been feeding off the gaming industry ever sense. One could also ask why investors in these companies came to adopt the view that the companies were entitled to compensation were licences not renewed.


Anonymous said...

I agree that the non-renewal of a licence is not a case of confiscation of property. The reliance on the valuation of a business based on the continuation of government dictat is very foolish. I would have no problem (in fact I would cheer) if restrictions on taxi licences for example were completely removed to be replaced only by regulations governing passenger safety. This would destroy the value of taxi licences overnight. Similarly any valuations based on restrictions on competition, such as used to be applied within the newsgency industry should be viewed with the gravest suspicion by those contemplating investing in such activities.

Unknown said...


I think you are losing it a bit of late with how much you hate the Labor party. You should face the fact that based on the empirical evidence the Liberals are no better. If I remember correctly, for example, gambling under Kennett increased massively (and there were also similar accusations of corruption), so its clearly both parties that are responsible. Furthermore, Kennett allowed gaming venues with indefinite terms and monopolies to exist, which seems even worse to me.

hc said...

I think that the promotion of gaming in Victoria was a mistake pushed by both parties. But assigning licences to two private firms which created billions of dollars of wealth transfer that could have been recouped by government is inept.

And it is true that a host of ex-Labor pollies and party hacks have worked for the gaming industry.

This has nothing to do with how much I 'hate' the Labor Party. It is the way the world is and pointing that out does not mean I am 'losing it'.

Anonymous said...

"why Joan Kirner gave such a huge profit entitlement to two private companies in the first place"

Nobody predicted that Victorian pokies would take off as much as they did. Tabcorp floated in 1994 at a bit over $2.00 which turned out to be a vast underestimate of its value.

whyisitso is quite correct. Any business model that relies on government licensing has got a strong whiff of Indonesia under Suharto. Much money can be made, but it can be all easily lost.

Anonymous said...


Look closely at the fineprint before you buy into the idea this is a reform.

The industry will still be operated with lisences.

Tie that into the 4 Corners story and you have the place where a new load of cash will come from to fill the ALP coffers